Is the Euro a Spear Pointed at the Heart of the European Union?

Chancellor Merkel sees the Euro currency crisis in this light. She sees it as speculator-driven and insists that it must be beaten – thus the €750billion package, one cannot yet call it a facility – to reassure the market. However, the true problem of the Euro is not speculation. Recent speculation is based on the fundamental contradiction at the heart of the entire Euro currency union: the social and fiscal incompatibility of the member countries. It was not speculators who drove up the cost of lending to Greece – the bond market had ceased lending to Greece at the rates that the country enjoyed while its debt was rated as essentially equivalent to the German bund. The public deficit of Greece in 2010 (9.8% of GDP) and the total government debt (123% of GDP) are such that bond markets had came to understand that the deficit was unsustainable. So, too for Spain, Portugal and Ireland.

Chancellor Merkel and President Sarkozy thought it outrageous that their Euro-based EU political construct should be queried in this brutal way by rating agencies downgrading Greek bonds to junk status. The Commission even proposed to regulate these agencies (which do have a poor record over securitized debt ratings) as if such regulation were possible.

The fundamentals are that Euroland is not (yet) a political and fiscal union; that the European Central Bank cannot at will practise a Frankfurt version of quantitative easing; that the prosperous north European countries and their taxpayers are not prepared to lend to buy the deficit paper of the Club Med countries and that they want these countries to deflate their economies to reach a longer term sustainable level of total government debt.

Some commentators believe that is possible that we are about to repeat the deflationary policies of the 1930s – which characterised the attempts to stay with the gold standard. Merkel and Sarkozy may learn that shoring up the Euro not only causes riots but also pins the entire EU region down with slow growth for some years. Their monolithic concept of the EU project is indeed threatened by the Euro currency union which defies gravity. The all-member currency club aspect of the union seems unlikely to succeed. But the EU project itself is bigger than the Euro. The Club Med countries may more quickly recover fiscal balance outside the Euro bloc where devaluation can deliver hope which is not available within the straitjacket of the Euro.